Processors bite the bullet on resin price hikes

Material prices are chronically on the rise, and processors are having a hard time passing increases on to customers. So what''s going on?

Facing the worst of possible worlds—weak demand and high feedstock costs—resin producers say that the price increases through which the industry has suffered are necessary to maintain profitability. Still stinging from recent price adjustments, processors are challenged to pass along increases to customers, most of whom are instead seeking reductions.

Throw in the fact that higher resin pricing further limits a processor''s ability to compete against molders operating shops in China—where labor and resin costs are considerably lower—and you have a prescription for disaster.

Between a rock and a hard place

"These price increases have just killed us," says Jay Bender, president, Falcon Plastics Inc. (Brookings, SD), a custom injection molder. "Our customers expect price decreases; most won''t even discuss a price increase."

Since last fall, prices of major resins such as polyethylene (PE), polyvinyl chloride (PVC), polypropylene (PP), and polystyrene (PS) have increased 10% to 15% across the board.

"It erodes what we accomplish on the technology side of the business to reduce prices," says Curt Watkins, president, Alltrista Plastics Corp. and Unimark Plastics (Greer, SC). "It also requires manpower in several departments to monitor price increases, negotiate, announce to customers, and then account for each increase in our books when it becomes extremely volatile."

Material suppliers point to an unstable global economy, volatile feedstock pricing, a competitive marketplace, and unsatisfactory margins as the primary drivers of increasing prices.

"We''ve also had to deal with sustained higher average costs of petrochemicals and nylon intermediate feedstocks," says Jean-Claude Steinmetz, president, Rhodia Engineering Plastics (Lyon, France). "Our analysis is that these new price levels we see for intermediates reflect structural changes, and not merely price volatility."

Indeed, 2003 was a difficult year for materials suppliers serving North America, as production and sales of U.S. and Canadian resins were essentially flat, according to year-end figures released by the American Plastics Council''s (APC) Plastics Industry Producers'' Statistics Group. Total resin production stood at 107 billion lb for the year, while sales and captive use reached 107.7 billion lb. Demand started to slip as buyers depleted inventories and held off on new purchases in anticipation of lower prices.

Resin producers have trimmed production and inventory levels in response to the demand slowdown, and say they are confident that sales will rebound when inventories are worked through. Suppliers say price increases have been warranted for some time to catch up with higher feedstock costs, but that prolonged softness in plastics manufacturing delayed pass-along attempts.

"That situation now appears to have changed for the better as the economic situation has improved in Europe and North America," Steinmetz says. "An additional factor is that demand is now exploding in China, which is actually putting capacity pressures on all suppliers." Rhodia has struggled to shore up its balance sheet and reverse losses in the face of high raw material costs, weak demand, and the strong euro, according to a recent published report.

It is difficult to predict how resin prices will fluctuate in the future. While raw material and energy costs are forecast to ease later in the year, a stronger economy and subsequent increase in demand for certain raw materials could keep the market supply/demand balance tight. "The economic climate in 2004 reflects increased demand and higher capacity utilization, which has resulted in price increases being accepted by the market," says Mark Dobson, marketing and sales director for BASF''s Polyamide and Intermediates Global Business Unit in North America.

Last year, resin producers moved aggressively to counter volatile feedstock costs by attempting to eliminate price protection. They had some success, but margins eroded because weaker demand resulted in lower prices midway through 2003. Contracts for major plastics companies are typically renegotiated every 12 months.

"People have always done pre-buying to stay ahead of price increases," notes Bill Bowie, COO, Resin Technology Inc. (Fort Worth, TX). The firm provides clients with critical information and strategic proposals to help them get the best resin prices. "There was even more of that done last December and January in anticipation of higher natural gas feedstock costs for producers."

Suppliers expect the next round of price hikes to stick. "Our customers recognize our cost situation, and see that resin prices are rising across the board," Steinmetz said.

Not so fast, say processors contacted by Modern Plastics. While processors understand their suppliers'' plight, some expressed dismay over what they consider a "take it or leave it" attitude. In addition, processors question why resin makers do not lower prices when feedstock costs decline. "They''re not sending a consistent message to their customers," Falcon''s Bender contends.

For their part, vendors say they''re simply attempting to maintain profit margins. "Price increase attempts are certainly justifiable in a open market," says Paul Anderson, global business manager, specialty film and sheet, Eastman Specialty Plastics (Kingsport, TN). "No resin company should be faulted for attempting to receive fair market value for its product."

What else is in store?

2004 did not exactly start out with a bang, as high natural gas and crude oil prices may contribute to further resin price hikes. Industry watchers estimate U.S. natural gas prices are $5 to $7/million Btus compared to about $3.4/million Btus in 2002. When U.S. natural gas prices skyrocketed earlier this year, processors were impacted because resin costs jumped as well.

This is not good news, as natural gas is a major feedstock. "North America is more dependant on natural gas as a base raw material product than other regions of the world," Anderson points out. "Therefore, North America is more vulnerable to price increases." Natural gas is reportedly in short supply due to infrastructure issues and increased demand from other areas such as heating fuel.

Some analysts expect the natural gas market to remain tight, with prices hovering around the $3.5 to $4.5/million Btu range until later in the decade, when new supply sources go onstream and liquid natural gas (LNG) import terminals are completed. Price swings could be further swayed by short-term supply shortfalls causing significant seasonal price spikes, and making it difficult for processors to get a read on when prices will stabilize.

"You have an industry built on paying $2 to $2.5/million Btus and now prices are around $5/million Btus," Bowie says. "You used to be able to anticipate what would happen at a particular point in the cycle to help you understand these markets."

Rising natural gas prices are only partly to blame, observers say. Higher crude oil prices have translated into additional costs for resins such as benzene and styrene, where oil is the base raw material. "We''ve seen the price of oil move to new higher average price levels, which have been sustained since prior to the Iraqi war," Steinmetz observes.

Some experts believe the supply/demand balance for specific resins is a more significant factor impacting resin pricing. In the polystyrene market, for example, there was substantial styrene production offline in North America during the first months of 2004 for maintenance turnarounds, says Kevin McQuade, director of BASF''s Polystyrene business in North America. "This tight supply situation, in addition to cost increases for basic raw materials, has driven styrene prices upward."

Still, a sustained period of high energy and feedstock prices does not necessarily condemn the industry to poor profitability. Resin pricing has little impact on overall demand, as the value of commodity resins remains quite high versus alternative materials.

Finding ways to save

Processors say they are doing everything they can to nullify the impact on customer pricing, including cost-reduction initiatives and automating specific operations to reduce labor costs. "We often work with our customers to explore cost-effective alternatives and sometimes eliminate parts where there are potential increases," says Jeff Rose, general manager, Collins & Aikman Corp. (Troy, MI), one of the largest injection molders in the world. "We will identify the largest impact, and focus on finding alternative replacement resins."

Molders can turn the tables on competitors by purchasing less-expensive resins from abroad, either direct from suppliers or through a third-party. "It''s a good tactic for us and it sends a strong message to the material companies that we can always vote by not buying," says Falcon''s Bender.

Gary Hengeveld, VP and co-owner of injection molder Inland Technologies Inc. (Fontana, CA), says his firm works with customers to ensure they do not lock into a single brand of material for specifications. It prefers to purchase resins from distributors rather because they offer value-added services. Plus, "it is much easier to negotiate better pricing with distributors who sell various brands of resins and can be more flexible."

Greg Valero [email protected]

Contact information